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According to a new report from Goldman Sachs (NYSE:GS), hedge funds and mutual funds are starting to pivot back to growth stocks from value stocks. These investors continue to build their positions in industries such as information technology and consumer discretionary. Sub-sectors within these industries include auto, semiconductors and e-commerce.
In a client note, top US equity strategist David Kostin added:
Mutual funds moved 66 bp away from Value, but still ranked in the 79th percentile compared to the past 10 years. Hedge funds added 74 bp of exposure to Growth and reduced length to Value by 30 bp. However, hedge funds are less biased to Growth than average (508 bp vs. 728 bp average).
The report also shows that mutual funds’ exposure to growth stocks is their highest level since mid-2018. In addition, many mutual funds are increasing their exposure to mega-cap tech names, such as of Tesla (NASDAQ:TSLA), and Alphabet (NASDAQ:GOOG, NASDAQ:GOOGLE).
5 Growth Stocks Hedge Funds Are Buying Now
Growth stocks have experienced a difficult year so far. For example, the Vanguard Growth Index (NYSEARCA:VUG) exchange-traded fund (ETF) is down more than 20% year-to-date (YTD), while Cathie Wood’s ARK Innovation ETF (NYSEARCA:ARKK) is down more than 50% YTD.
However, after a steep decline, growth stocks may become more attractive to institutional investors. Goldman research shows that the weight in growth stocks with no or low profitability from hedge funds with long portfolios increased to 3.8% from 3.5%. Meanwhile, the weight of growth stocks with high profit margins declined for the third consecutive quarter. The turn back to “low-quality stocks” acted as a tailwind for the second half of the year’s returns.
So, who exactly do hedge funds buy? Included in the top five names Service Today (NASDAQ:NOW), Uber (NYSE:UBER), MasterCard (NYSE:M.A), Visa (NYSE:v), and Calm down (NYSE:HUM). Other names that made the cut include Fiserv (NASDAQ:FISV), Wells Fargo (NYSE:WFC), and Danaher (NYSE:DHR).
The cycle back to growth seems to follow a risk-on type of environment. Inflation has been a major drag on the recovery this year, although the July report showed 0.3% core inflation month-over-month while economists had expected 0.4%. The next report will be revealed on September 13.
As of the date of publication, Eddie Pan does not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writers, subject to InvestorPlace.com’s Publishing Guidelines.